Foreign Exchange Trading Basics - For currency trading and forex education and forex help.

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TRADING BASICS

Courtesy of DailyFX.com

Quoting Conventions: What the Numbers Mean

Currencies are always quoted in pairs. One unit of the base currency (first currency in the pair) represents the number of units of the second currency of the pair as indicated by the exchange rate.

Example: USD/CHF @ 1.4000. This means 1 US dollar purchases 1.4000 Swiss francs.

Example: USD/JPY @ 120.50. This means that 1 US dollar purchases 120.50 Japanese yen.

In the OTC spot FX market, currencies are always quoted in pairs: for instance, a trader cannot simply trade the US dollar (USD); instead, he/she must trade the US dollar against another pair, such as the Japanese yen (JPY) or Swiss franc (USD/CHF). The spot FX market involves speculation upon the exchange rate between two currencies, and hence the two currencies whose exchange rate is being speculated upon must be identified via the quoting conventions.

Suppose a trader purchase 1 lot of EUR/USD at a rate of 1.0795. What does this mean? The quoting convention in the OTC spot FX market essentially means that 1 unit of the base currency (first currency in the pair) purchases the number of units measured by the exchange rate of the counter currency (second currency in the pair). So, in the aforementioned example, 1 euro purchases 1.0795 US dollars.

From a speculation viewpoint, it is beneficial to think from the perspective of the first currency in the pair (the base currency). If you believe the base currency will rise in value, then you would buy the pair; alternatively, if you believe the base currency will fall in value, then you would sell the pair and profit as the exchange rate moved down.

Next: Spread: The Fundamental Cost of the Trade

Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.